Monday, March 22, 2010

For those who has been keeping track of the British pounds will notice the recent rapid depreciation of the currency. Over a period of two years, the pound has fallen almost 30% against the ringgit. How nice if I could delay paying my MBA tuition fees!

There are many factors affecting the British pounds. The following are some of them:

1. Current account deficit

Since 1997, UK's current account has been in bad shape. Having a current account deficit means that the country is spending beyond their means, or they are importing more than what they are exporting. This will increase the supply of British pounds that subsequently reduce the value of the currency.

2. Fiscal policy

Over the years, the British government has been proposing a national budget that is bigger than before. The 2009 public spending on welfare and social security stood at 650 billion pounds which was equivalent to about 46% of the UK GDP. The unprecedented size of the UK budget deficit has in fact balked by many economists as that means more public debt to finance the budget deficit. As such, many believe that the sterling pounds will remain weak and it may eventually reach parity with the euro.

3. The Greece effect

As UK is located in the Euro zone not far from Greece who also has great appetite for debt. Many people suggested that UK will be the next Greece. However, that's not the case. Although UK is highly debt ridden with a debt of 60% of its GDP, but compare to Greece, this is much better as Greece's debt is recorded at 130% of its GDP!

Overall, the above are the economic reasons for the weak pounds, however there are other factors such as political scandals, the purchase of AIG by Prudential and so on that will definitely aggrevate the problem.

Anyway I told my students if the pounds really hit parity with the euro, I will convert all my savings into pounds... Just kidding!